An energy consultant’s view on Chile’s latest regulated supply tender

Chile’s latest regulated supply tender concluded, with generator Enel sweeping the board.

Enel was awarded all the 3,600GWh/y of supply offered in a process that saw interest wane compared with previous tenders and the average price awarded climb to US$56.70/MWh from US$37.40/MWh in the 2022 process.

The company put forward existing generation plants and, despite incentives built into the rules, no energy storage systems were awarded. 

A large chunk of the tendering period coincided with discussion in congress over the gradual unfreezing of electricity rates following the social protests of 2019, which, along with cost factors and a high percentage of grid congestion and curtailment, likely dampened interest this time around.

National energy commission CNE, however, said the process was successful given that all supply on offer was awarded – compared with only a portion in the 2022 process – and that officials would continue looking at ways to fine-tune rules.

Against the backdrop, CNE commissioned a tendering process perception survey and recently published the findings, which show that financing, market conditions and permitting were the key factors impacting participation. 

To get a snapshot of the 2023 supply tender results and what to expect in the 2024 process – which is underway – BNamericas conducted an interview with Patricia Dárez, managing director of Latin America-focused engineering consultancy 350renewables.

BNamericas: What are some of the principal conclusions, or what are the chief takeaways, of the 2023 regulated supply auction results? That is, what are people saying in the local market? 

Dárez: The main takeaway is that there is less interest in the regulated tenders. Only five companies took part. Most companies in the market have now a strong focus on bilateral [power-purchase agreements] PPAs.

The prices have gone up significantly from the last four tenders (all tenders after 2015, which is when renewables started taking part). The average allocation price is almost 50% above what was awarded in the 2022 tender. And this is without considering the systemic costs which are extra and passed to the consumer. These costs are in the order of US$15/MWh. In a way, it is a marker that the market risks are clearer and more transparent.

CNE seems to be more optimistic than the generators, as approximately 75% of the offers were above the maximum bid price that the CNE set. I tend to think that the bidders are in a better position to understand the risks than the regulator.

I also found it interesting that Enel was allocated all the energy and while their offers contain a mix of technologies, they did not include either [solar] PV or storage.

Another key takeaway is that the shadow of the [price stabilization mechanism] PEC is still hanging heavily in the air and that freezing tariffs is hopefully something that we have all learned from and that will not be repeated. I see it as a positive development that the Chilean energy ministry has successfully passed legislation that should correct this over the coming decade and which was recently published, on 30 April.

BNamericas: Although all the supply that was offered was awarded, the number of bidders was down compared with previous years and Enel was the only successful party. Could that mean the 2024 auction process could see changes to bidding rules to spur participation, for example?

Dárez: It certainly has not promoted storage or new projects. The Enel projects are all built. 

I would say that one of the main innovations in the tender rules was that the systemic costs were passed onto the consumers. This definitely led to more interest in the tender than it would have had otherwise. But it also led to consumer association Conadecus writing a complaint letter to CNE which even asked for the tender to be declared void.

In the end, the regulated tenders are to meet the electricity demand of consumers. Electricity is an essential need for society and for development. The consumers are in a position where they cannot negotiate their rates and are potentially going to end up with higher prices which they can do very little about.

It is important that the tenders and the rules consider this, but not just the tenders, the general regulation, too. We are after reliable, affordable, green and accessible energy.

BNamericas: Awarded regulated supply contract prices have trended up in recent years. Is there a general consensus on why that has happened and what we can expect in the 2024 supply auction? 

Daréz: Without major changes to the rules, my guess is that the prices are likely to stay similar to the 2023 tender. I do hope that the ceiling price from CNE is able to better reflect the offers.

One idea that I like and that has been taken on in other markets is the contract for difference, or CfD, concept. This contract mode ensures that if there are very low prices, the bidders are paid at least a minimum, or floor, price. But if the prices are too high, above a ceiling price, the companies need to pay back some of the profits. In effect, they provide safety for smaller investors and a warranty of stable prices in the long run.